CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)1 This chapter...

CHAPTER 12FINANCIAL MANAGEMENT

April 10, 2023 ENTREPRENEURSHIP (Ms. Hawkins) 1

This chapter describes the importance of managing your business finances.

Create a cash budget

Examine the role of credit

Improve your business cash flow



MANAGE YOUR CASH FLOW

Create a Cash Budget

As a business owner, you will haveto make sure that you have enough cash to cover your expenses.A Cash Budget shows projectionsof your cash coming in and goingout; shows estimated, actual, andthe difference between the two.Use an electronic spreadsheet.

CASH BUDGET Estimated Actual Difference

Cash receipts $14,000 $18,000 $4,000

Cash sales $2,000 $4,000 $2,000

Accounts receivable payments $11,150 $13,150 $2,000

Tax refund $850 $850 $0

Total cash receipts $14,000 $18,000 $4,000

Cash disbursements $8,300 $10,125 -$1,825

Salaries $4,500 $5,500 -$1,000

Gasoline $2,500 $3,125 -$625

Vehicle maintenance $350 $400 -$50

Utilities $50 $50 $0

Advertising $150 $300 -$150

Insurance $500 $500 $0

Other $250 $250 $0

Total cash disbursements $8,300 $10,125 -$1,825

Net cash increase/decrease $5,700 $7,875 $2,175

CASH BUDGET FOR MARK’S SNOW REMOVAL SERVICE

A minus sign for cash receipts means less cash was received than estimated.

A minus sign for cash disbursements means more cash was disbursed than estimated.




Examine the Role of Credit

Recently there has been much in the news about frozen credit markets. What does this mean and what are some outcomes?

As a business begins operation, there will be costs that will be too expensive for you to pay all atonce.





Businesses won’t make payroll or have capital to stock their shelves.

Frozen credit markets means credit is frozen or very hard to get, even for people or businesses with good credit.

Consumers can’t get car loans or mortgages, and credit card spending limits might be lowered.





Trade Credit (credit offered by one business to another)

Consumer Credit (loans and credit cards)

Types of credit: two types





The negotiated price of goods purchased on trade credit will often be higher than the cash price.

Trade Credit





The two basic forms are loans and credit cards.An unsecured loan is granted based on credit history.

A secured loan (installment loans—cars)

Consumer Credit





Previous credit historyEmployment recordAssets ownedMoney available for making paymentsFinancial references

Once an entrepreneur decides to extend credit, policies (Credit Procedures) must be developed.




Even when you are careful about extending credit, some customers just don’t pay their account balances—Uncollectible Accounts.

Who pays for this loss to the entrepreneur?





Improve Your Cash Flow

Increase cash receipts

Decrease cash disbursements

Do both

If your cash receipts will not cover your expenses, you will need to take action to improve your cash flow:





Offer discounts on bills paid right away.

Establish tighter credit policies.

Establish a follow-up system for collecting unpaid accounts receivable (collection agency).

Increase Cash Receipts:





Control inventory and payroll.

Slow bill payment to your suppliers.

Cut other expenses (reduce variable expenses like advertising).

Decrease Cash Disbursements:



ANALYZE YOUR FINANCIAL PERFORMANCEAnalyze Financial Statements

Analyze your sales (by product or dept.)

Analyze net profit on sales (net income after taxes/net sales)

Set and meet profit goals

Analyzing financial statements can help your sales and profits, as well as help you set and meet goals.




Analyzing your sales by product can help you make decisions about the kind of inventory to stock.

Analyze Your Sales




Analyze Your Sales...Which department would you reduce?

DEPARTMENTAL SALES - LEE GARDEN AND PATIO

Department Sales Percent of total

Outdoor furniture $110,000 56.7%

Outdoor grills $37,000 19.1%

Plants $24,000 12.4%

Garden tools $23,000 11.9%

Total $194,000 100.0%




Net sales is the dollar amount of all sales, after returns have been subtracted (gross sales – returns).

Gross sales is the dollar amount of all sales, including returns.

Analyze Net Profit on Sales

Net income after taxes ÷ Net sales = Net profit on sales




How do you find net income after taxes?

Gross profit

Net income from operations

Net income before taxes

Analyze Net Profit on Sales…





Gross profit: profit before operating expenses are deducted.Net income from operations: gross profit minus operating expenses.Net income before taxes: net income from operations minus interest expense.

Analyze Net Profit on Sales…





Analyze Net Profit on Sales…Example


$27,255 ÷ $231,800 = 0.118 or 11.8%

In this example, profits represent 11.8% of sales. These numbers can be seen on your income statement. Compare with the previous year or with industry ratios.



HENDRICK'S AUTOMOTIVE SUPPLYINCOME STATEMENT YEAR 2009

Revenue from salesGross sales (all sales including returns) $235,000Less returns $3,200Net sales (Gross sales – returns) $231,800Cost of goods sold (inventory) $150,000Gross profit (Net sales – Cost of goods sold) $81,800

Operating expensesSalaries $26,200Advertising $1,200Rent $8,400Utilities $1,800Insurance $1,300Other $1,000Total expenses $39,900

Net income from operations (Gross profit – Operating expenses) $41,900Less interest expense $2,400

Net income before taxes (Net income from operations – interest expense) $39,500Less income tax paid $12,245

Net income after taxes (Net income before taxes – income taxes) $27,255




Your goals reflect the amount of profit you hope to earn during a particular year.

A goal could be to increase your profit ratio to 15.0%

Set and Meet Profit Goals

$27,255 ÷ $231,800 = 0.118 or 11.8%




The breakeven point is the volume of sales that must be made to cover all the expenses of a business.

Perform Breakeven Analysis




The breakeven point is the volume of sales that must be made to cover all the expenses of a business.

Perform Breakeven Analysis: Breakeven Formula

Total fixed costs = Breakeven point

Selling price per unit – Variable cost per unit

Total variable costs ÷ Number of units = Variable cost per unit




Charlene’s fixed costs are $40,000 a year. Her selling price is $3.50 per unit. Her variable cost is $0.95 per unit. How many units does she have to sell to break even?

Perform Breakeven Analysis: Example

40,000 = 15,686 units

3.50 – .95



ANALYZE YOUR FINANCIAL PERFORMANCEHire Experts

Various professionals provide financial management services:

Hiring a Professional

Bankers (read financial statements)Attorneys (know financial laws)Accountants (prepare financial statements)Financial Planners (help manage assets)Investment Brokers (advice on investing excess cash)




Experts can help with various types of planning:The Services of Financial Experts

Financial planning (make recommendations on increasing sales and reducing costs)Strategic planning (make decisions that affect your business in the long term)Tax planning (minimize the amount of tax you will have to pay)




The Internal Revenue Service (IRS) randomly selects individuals and businesses to investigate.

Investigation of a tax return is an audit.

You and/or your tax preparer will have to explain how the return was prepared.

Tax Audit



The End!

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